The infrastructure bill has sparked a surge in public works projects, presenting a prime opportunity for growth and allowing contractors to expand their businesses through public works projects. Companies competing for work in this space seek an edge over their peers. One approach is offering attractive benefits to retain current employees and attract new talent to the field. Additionally, it is essential to understand the Davis-Bacon Act and Prevailing Wage laws and how they apply to publicly funded construction contracts.
What is the Davis-Bacon Act?
The Davis-Bacon Act was put in place to protect wages for laborers. It is a federal law that requires contractors and subcontractors to pay, at the least, the local prevailing wages, including fringe benefits. The Act applies to federally funded projects, as well as state and locally funded projects where applicable, and varies based on geographic location and craft.
What is the Prevailing Wage?
Understanding prevailing wage is crucial for ensuring everyone is compensated fairly for their hard work. Under the Davis-Bacon Act, contractors who work on federally funded construction projects (in excess of $2,000, lower in some states) must pay their workers the prevailing wage. The US Department of Labor determines prevailing wages and includes the hourly base wage, benefits, and overtime pay.
The prevailing wage ensures that construction workers receive good wages and benefits, which helps maintain a stable workforce and provide quality craftwork.
When do Prevailing Wage Laws Apply?
- YES – Laborers & Mechanics on qualifying projects whose duties are manual or physical in nature
- YES – Work done on site of project defined by DOL
- NO (generally) – Owners and administrative employees
How exactly do you know the wage determination for a particular project? One way to find out is by accessing them on the US System for Award Management website – sam.gov or by your specific state’s Department of Labor website. But how are these rates determined, you may ask? The US Department of Labor determines these wages based on surveys of wages and benefits paid in local construction markets. It is important to remember that there are:
- Significant pay differences between regions
- One or multiple wage determinations may be assigned to one project
- Once set, it stays in effect for the duration of the project(s)
Here’s a wage determination example for a Drywall Installer/Lather (Carpenter) in California:
Fringe Dollar Allocation
It’s important to know that there are four legal uses of fringe dollars:
- Health and Welfare / Ancillary Benefits
- Health and Welfare includes:
- Fully Insured ACA Health insurance benefits
- MEC – Minimal Essential Coverage
- HRA — Health Reimbursement Arrangement
- Ancillary Benefits include:
- Group Whole or Term Life Insurance
- Long/Short-Term Disability
- Pension and Retirement, such as a 401(k)
- Vacation and Holiday
- Qualified Approved Apprenticeship Plan
Bona Fide Trust
A contractor’s prevailing wage obligation may be met by any combination of cash wages and creditable “bona fide” fringe benefits provided for a covered worker. (Found in DOL, 29 CFR 5.26) This means that fringe benefits (other than cash) must be made to a trustee and/or third person irrevocably and must be under a fund, plan, or program. This “third person” or “trustee” cannot be affiliated with the contractor or subcontractor and must assume the fiduciary responsibility imposed upon trustees by applicable law.
How does any of this help save you money?
First, let’s define “labor burden.” Labor burden is what you pay above and beyond wages in salaries in the form of payroll taxes (FICA), unemployment taxes, and insurance premiums to pay your employees their hourly wage. (The labor burden rate is paid by the company but is not paid to the employees.)
Let’s say you’re working on a new prevailing wage project with a base wage of $47 and a fringe benefit of $21. If we pay as cash through payroll, we pay the labor burden on the $68, which is $20.40 resulting in a total of $88.40 an hour.
If we pay only the base wage of $47 through payroll and the $21 of fringe to the irrevocable bona fide trust, our labor burden is $14.10 an hour because the $20.40 avoided payroll. We save $6.30 an hour in labor burden.
The average company does not do 100% prevailing wage. Let’s look at XYZ Construction, which does 50% prevailing wage work. If we take their savings of $6.30 per hour per employee from above and apply it to 1,040 prevailing wage hours, that’s $6,552 per year. Multiply that by their 25 field employees, and they pocket $163,800 for the year.
So, let’s say XYZ Construction wants to look at employee benefits for their field workers. If we multiply that fringe amount of $21/per hour per employee by 1,040 hours (50% PW hours), that comes to $21,840 per year. Multiply that by their 25 field employees and that $546,000. That’s a little more than half a million that can be used to pay for and fund an employee benefit plan (such as retirement, medical, vacation & holiday, or apprenticeship program)!
If you would like to learn more about the Davis-Bacon Act, prevailing wage, or how to maximize your prevailing wage dollars and save money with an employee benefits package explicitly built for contractors (while staying compliant), reach out to the Beneco Team. We can help you without any commitment, but we can create a plan if you choose!